Author Topic: Advantage of using historical cost  (Read 279 times)

Offline Repon

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Advantage of using historical cost
« on: July 08, 2015, 01:35:07 PM »
What is the advantage of using historical cost on the balance sheet for property, plant and equipment?

The main advantage of using historical cost on the balance sheet for property, plant and equipment is that historical cost can be verified. Generally, the cost at the time of purchase is documented with contracts, invoices, payments, transfer taxes, and so on.

The historical cost of plant and equipment (not land) is also used to determine the amount of depreciation expense reported on the income statement. The accumulated amount of depreciation is also reported as a deduction from the assets' historical costs reported on the balance sheet. (In the case of impairment, some assets might be reported at less than the amounts based on historical cost.)

The use of historical cost is also a disadvantage to those users of the financial statements who want to know the current values.
Senior Lecturer in Accounting
Department of Business Administration
Faculty of Business & Economics
Daffodil International University

Offline sajib

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Re: Advantage of using historical cost
« Reply #1 on: August 24, 2015, 10:43:21 AM »
Advantages of historical cost accounting:

In spite of several restrictions and defects in the model of historical cost accounting, yet it has been picked and preferred time and again. Better than most available alternatives, historical cost accounting model/method is still the standard form of accounting because of its unique features and conventions. Even though there are lots of flaws in the model of traditional accounting yet forms the basis for accounting for one reason that the accountants hesitate to value the assets at the current market price. This is because many accountants and accounting firms have been exposed for malpractice and creative accounting over past few years since considering current market values are seen to have a direct impact on the price value of the shares. It is the duty of the accountant to safe guard the integrity of the data against any sort of modifications and considering the current market value would change the facts and the figures. The management can use alternative measures to evaluate assets with great caution to influence the value of the assets. Manipulation do exist and critics do assert this fact however they are of opine that how the current values are integrated can be defined with certain set of rules. Another advantage of this model is that managers have a choice of alternate resources in measurement, recognition and reporting economic information which based on past data, they can forecast the future operational costs.
Kamrul Hossain Sajib
Assistant Controller of Examination
Daffodil International University